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The Chatham House Report on the International Monetary System

Post By gaia1 in American Monetary Matters

The Chatham Houset is probably one of the most comprehensive projects assessing the present international monetary system and ways to move forward. Its editors provided an informative table on page 8 synthesizing the findings of the 11 articles and the many meetings, workshops that preceded them.


The report reflects the thinking in the UK given the predominance of the British authors/academicians with some participants from Canada, US and China. There were no authors from the global South or from the UN system where monetary expertise exists specifically in its Department of Economic and Social Affairs and UNCTAD. Its focus reflects G20 and BWIs thinking. Most incisive dialogues took place on March 19 and 19 when ECOSOC conducted its meetings with the BWIs, WTO and UNCTAD about financing for development. A summary of which can be found at A Statement by the International Institute of Monetary Transformation about the need to integrate financing for development and climate justice can be found


I can agree with most of the recommendations as reform proposals. They can function was a way station to the real transformation that is needed to have the international monetary system deal with not only the financial and economic crises, but also the climate crisis. My main objection to the CH report is that it is not bold enough in looking at the international monetary system as a pivot to effect transformational change, particularly in respect to the climate crisis.


When Goldman-Sachs author O’Neill presents two scenarios for the future international monetary system I would like to add scenario 3 that is based upon a high level of international cooperation in forging an international monetary system that is based upon the Tierra de-carbonization monetary standard. It would depart from his scenario 2 where a flexible SDR is the basis.


It is time that academicians and banking researchers become emboldened to start thinking of reserve and vehicle currencies that are not only nationally or multicurrency based, but go beyond the currency, that look for the development of standards that are emissions based. China and the other BRIC countries may gain strength in their economies and their currencies, but if the world as a whole is unable to effectively deal with the climate crisis, their accomplishment is a Pyrrhic victory.



The US-China Currency Dispute

Post By gaia1 in Exchange rates

          While the Chinese currency policy caused tensions in the early 1990s, it became highly contentious in March 2010 when the world’s economy was still reeling from the devastation of the financial crisis of 2008. It reached fever pitch when Chinese premier Wen Jiaboa declared on March 13 after the closing of the annual legislation session of the National People’s Congress that the yuan was not undervalued and that Chinese currency policy was based upon a “managed market-oriented” approach of floating exchange rates. The only linguistic difference with his terminology and that one President Obama was the term “managed”.


          Within days, particularly in the USA, a bevy of dramatis personae got involved: President Obama, US Treasury, 5 Senators, 130 House members, the New York Times columnist Paul Krugman and its editorial board. Probably, so many more newspapers, magazines, talk shows, blogs will get involved, all either declaring the Chinese currency policy currency to be manipulation or demanding to have the U.S. government declare it currency manipulation, so that import duties can be levied against this flagrant violation of free trade.


          Is this currency conflict to be considered a minor spat or a major issue that deserves all this attention in both the US, Europe and elsewhere? What can be done about it if it is considered a major international issue?


It first of all shows how important the international monetary system is, because floating, market oriented exchange rates are an essential component of the present “non-system” of international monetary relations and “managing” them violates even this “non-system”. During these hard economic times when each nation is desperately trying to create opportunities for restoring economic well-being and placing (inordinate) confidence in the job-creating function of their international trade policies, the undervalued yuan creates an unfair advantage for China that reduces the chances of global recovery and adversely affects the importing country. Thus, this out-of-balance international monetary system not only affects international trade, but also the world economy. It shows how the international monetary system is the glue of the other systems and, if it does not work properly, the whole system becomes unglued.


Secondly, China’s reserves stood at $2.4 trillion at the end of 2009 of which $900 billion are in dollar-denominated US Treasuries—a large pool of assets the sudden changes of which could be disruptive in many ways, both for China and the US. Columnist Krugman believes that the US has China over the barrel rather than the other way round. The US could withstand sudden shifts away from the dollar while China would be holding devalued dollars. The system as a whole would be unstable for some time.


Thirdly, the currency dispute can become a protectionist tool during these times of recession and unemployment. It ties in with world wide stimulus plans. (China has started to describe its currency interventions as stimulus.) But unlike extra stimulus spending Chinese currency interventions do not expand global demand, but shift it from other countries to China. Moreover, it was decided in Pittsburgh that the G20 economies would share their economic plans, so that the world would not lurch from recession into protectionism and inflation.


The vehemence of most of the responses, present ones and future ones, shows that the issue is considered a major issue that could test the fragile cooperative mode among the G20 and could lead to sanctions not only in the US, but also Britain and the EU. It could even result in having the WTO adjudicate (behind close doors) the issue at considerable financial costs because of its expensive procedures. At the same time, Rome is burning and the millions of unemployed persons are not helped by this fracas.


          Is the Ex EU president and ex Italian premier Podi correct in advising the world to stop nagging China and to get accustomed to the assertive policies of an emerging nation? I think he is underplaying the severity of the impact of its currency policies, perhaps also due to the fact that is guest teaching in a Chinese university.


Premier Wen made clear during this over 2 hours news conference for Chinese and foreign journalists  that China is defending against “finger pointing” and charged developed countries in forcing unfair  changes by “just for the purposes  of increasing their own exports”. “I understand that some economies want too increase their exports, but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose increasing their own exports.” Wen believes that such policies are cause for alarm because it amounts to trade protectionism. He also believes that it is matter of “national credibility” for the US to protect its dollar. “With regard to monetary policy, it is important for us to maintain appropriate and sufficient money supply, keep interest rates at a reasonable level and manage inflationary expectations." He also pointed to the feasibility of working together. "China's total trade is high, but 50 percent is processing trade, and 60 percent of China's exports are made by foreign enterprises or joint ventures. If you restrict trade with China, you are hurting your own countries' firms."


          What has to happen, first, is to establish for a fact whether the yuan policies are manipulative or not. The IMF was called upon to investigate. As a matter of fact it already did investigate the issue and concluded that the currency is “substantially undervalued.” However, this investigation is not made public by China who has the right to suppress it. Having acquired a recent seat at the IMF that is appropriate according to its economic status it used its power as other nations would have done. According to the US based Peterson Institute of International Economics’ executive director Bergsten the yuan is undervalued by 20-40%.


          What has to happen next is to question the international monetary system which is unable to deal with an important nation’s unfair currency policies in an effective way. Probably, some accommodation will be found and the stage is set for another fracas where the accommodation is less likely to be forthcoming. In other words, what is needed is thorough reevaluation of the international monetary system, particularly its global reserve system.


          Nobody among the loud American voices on this currency dispute has pointed out that part of the problem is the US dollar being the world’s major reserve currency that contributes to global financial imbalances, particularly the surplus of about $1 trillion in Chinese coffers. By having a non-national reserve currency, the U.S. government would not be able to sell its Treasuries for .5% and fund its huge deficits and China would not have those surplus dollars.


          Under the TFD system scenario an enormous, i.e. transformational step would be taken, far surpassing, but including the currency problem of manipulation and, also, of currency speculation. As a matter of fact, the TFD system goes beyond the monetary challenges and combines them with the climate challenges, which are even more demanding.


Under the TFD system, in phase 1,  the global reserve system would be based a carbon-based international reserve currency of the Tierra, removing dollars, euros and yens into a nation’s economic activity. The reserve Tierras are convertible only with its own currency, not with other currencies. So in this phase greater financial independence is created, since a nation’s reserve system is not bound to another nation’s currency. Moreover, given that the UN Tierra International Clearing Union monitors financial flows, nations have a better idea of how to cope with financial flows.


In phase 2 the international monetary system as a whole would operate on the carbon-based international vehicle currency of the Tierra and regulate financial flows under the control of the UN World Central Bank. In this phase its transparent and democratic Board of Governors is able to discipline a nation if necessary. However, that would be an exceptional case, because the monetary and fiscal procedures that were established by the Articles of Agreement of the Tierra Treaty are fair and stable.




No fractional reserve banking for commercial banks

Post By gaia1 in American Monetary Matters

Money from thin air

High street banks issue money in the form of loans. Could this be the root cause of the credit crunch?

James Robertson, Thursday 20 March 2008 17.00 GMT

Northern Rock has been nationalised. A report by the Commons treasury select committee on how various government institutions failed has meant little to anyone except insiders. The government is canvassing complicated proposals to increase banks' compensation to depositors whose money they lose in future. And a distinctive feature of the budget was its 23 motherhood-and-apple-pie references to "financial stability".

Meanwhile, the global credit crunch is spreading and deepening. Complicated calculations suggest that the billions of dollars, euros and pounds already "lost" by banks are turning into trillions, but even the banks themselves don't know how much it really is.

What we do know is that, once again, governments' failure to control the greed of bankers is creating financial disaster for many innocent people; and that, once again, officialdom has failed to ask the basic questions about why this has happened, and to give answers in words that normal citizens can understand.

At the heart of the matter is the fact that commercial banks are allowed to create almost all the money we use. They create it out of thin air and put it into circulation in the form of profit-making loans. They credit those to their customers' accounts by a simple accounting procedure, and their customers spend the money into circulation.

This bank-account money is the money that all of us, people and organisations alike, have in our bank accounts. It is held in electronic form in bank computers. It is far and away the largest part of the money supply. The rest, less than 5% in this country, is "cash". This is issued by agencies of the state in the form of paper banknotes by the Bank of England and metal coins by the Royal Mint.

The key question is this: did the banks' privilege of creating bank-account money to lend to one another play a significant part in fuelling the credit bonanza, subprime market and financial boom that bust, leaving such a tangle of international interbank indebtedness that central banks and other authorities like the Financial Services Agency could not assess the potential consequences if it unravelled?

The answer, of course, is yes. But supposedly democratic parliaments, governments and monetary and financial authorities avoid explaining points like that to citizens in understandable words. Secrecy and deception about how the money system works, why it works as it does, and whether there might be a clear and simple way in which its workings could be reformed in the public interest, undoubtedly contributes to disillusionment with democratic politics and government.

Monetary reform would not be complicated. At present the Bank can only try to influence how much new money the banks create, by regulating interest rates. Monetary reform would make the central bank responsible for creating required additions to the money supply. We would simply be following the example of our 19th century predecessors, who recognised that banknotes were no longer just the "credit" notes they had once been, but had become money accepted by everyone for making payments. So they transferred from other banks to the Bank of England the function of issuing them. Similarly, everyone knows today that bank-account money has become real money, and is no longer just something called "credit".

Transferring the function of issuing bank-account money to the central bank would deprive the commercial banks of a nice little earner, and reduce the power they exercise over the economy and society as a whole. They would fight against it - no holds barred. That is a scary prospect for most practising politicians, government officials, City lawyers, economic academics and commentators, as well as bankers themselves and others professionally connected with money and banking. Until they see the "risk-to-reward ratio" for career survival and success shifting in favour of taking monetary reform seriously, they will keep their heads below the parapet.

So the challenge is for independent citizens outside the mainstream political, economic, and financial complex to start shifting that ratio from outside. We should begin by pressing the chancellor and others responsible for managing our money system to tell us, in words we will understand:

• Where did the billions of money come from which fuelled the credit bonanza, subprime market and associated financial boom?

• Broadly what proportion of that money was created out of thin air by commercial banks as loans to one another to invest in risky packages of already existing debts?

• Did their ability to create it for that purpose make it more difficult for the authorities to assess the potential consequences of the tangle of international interbank indebtedness when it threatened to unravel?

• Who are the people who have actually suffered from the banks having "lost" billions of pounds and dollars?

• Where have those billions gone? Where are they now? Who got them, and what have they done with them? Have they "been laughing all the way to a bank" with them? Is their bank quietly laughing too?

• Or have the lost billions simply disappeared into the thin air from which bankers originally created them?

• If so, during their return journey from and then back into thin air, roughly what proportion of them will have enriched the bankers and other financial operators who handled them on the way?



UN Commission on Monetary Transformation and the Climate Crisis

Post By gaia1 in United Nations


            During these carbon-constrained times scant attention is being paid to the challenges of the climate crisis in monetary conferences and in academic articles dealing with  monetary and financial affairs. Each area of human endeavor seems to exist in supreme isolation. It is time that  the dynamic interaction and the synergies between the international monetary system and the climate crisis social system be explored and be used to rejuvenate both systems.

            To that effect I am proposing that both the climate crisis, the global economic development, the climate justice  and the monetary communities begin laying the groundwork for a UN Commission on Monetary Transformation and the Climate Crisis, to be established by the Cancun COP 16 of the UNFCCC in December 2010 or at COP 17 in 2011, so that its results can become part of the political process of the Rio 2012 Earth Summit. It is further suggested that UNDESA’s World Economic and Social Survey (WESS) continues focusing into greater depth on international monetary system reform than it did in its Geneva workshop in early February in preparation of WESS 2010.

            Expressed in terms of global financial imbalances—the bane of our present economic malaise—and of global ecological imbalances—the bane of poor climate negotiations—the challenge becomes to find ways to resolve those two types of global imbalances creatively.

            Important for this daunting challenge is to find agreement on a value-based framework such as the Earth Charter that make all participants look into the same direction.


·        To explore how a reformed or transformed international monetary system can be used as a means to strengthen solutions to the climate crisis and to promote global economic development

·         To explore how the recommendations of the June 2009 Report of the UN Commission of Monetary and Financial Experts can be integrated with reformed or transformed international monetary system

·        To evaluate the various proposals made for international monetary reform, particularly in respect to global reserve system

·        To evaluate various proposals that integrate the monetary system  with social system dealing with the climate crisis, particularly the Tierra Fee & Dividend system which is based upon a de-carbonization monetary standard

·        To explore the contents and process of climate negotiations and how they can be strengthened by a transformed international monetary system that uses present monetary reforms as basis for its transformation

·        Develop a Plan of Action


·        Determine the value-based framework that will guide the Commission

·        Review the fact of ecological indebtedness and its future role in climate change negotiations, using, among others, findings of the Cochabamba Conference of April 2010

·        Review the contents and process of the climate crisis negotiations and explore ways how they can be strengthened by their dynamic interaction with the international monetary system; Review the 2009 Commission recommendations in light of its potential for reducing the climate crisis

·        Review the present proposals for the reform of global reserve system as discussed in the WESS work shop’s background paper by professors D’Arista and Erturk and the UN-DESA Policy Brief #27 of January 2010 in light of reducing the climate crisis

·        Survey the present climate funding facilities, including the recent High Level Advisory Group, and the efficacy of pledging conferences and compare them with the needed budgetary transfers to fund climate mitigation and adaptation measures and development.


·        several members of the 2009 UN Commission of Experts

·        several staff members of the UNFCCC, UN/DESA, UNCTAD

·        monetary economists from academe and business

·        CoNGO representatives and their designees


            We live in a complex world where the role of governments of regulators and drivers is not to be decreased, but to be increased. This dual role cannot be accomplished without striving for policy coherence and international cooperation. A UN Commission on Monetary Transformation and the Climate Crisis has at least to explore the possibility and feasibility of having both rejuvenate one another and of bringing a coherent climate funding system into existence .

“Without vision, people perish” Proverbs 28:19

“Whatever you can do, or dream you can, do it. Boldness has genius, power and magic in it.”

Johann Goethe





The case for frugal trade

Post By gaia1 in Frugal trade

There are at least four good reasons to pursue an international trade policy that includes frugality as one of its major principles. Frugality is a virtue that aims to use resources without waste, even use them sparingly. It is a virtue that is in ascendance given the economic and climatological constraints on the Earth’s resources due to an ever growing human population.


Frugal trade for consumers means becoming locavores—eating and drinking locally to reduce food miles. Frugal trade for local authorities and national governments means policies and programs that emphasize local agriculture and manufacture without engaging in financial or commercial protectionism. Frugal trade for transnational corporations, the IMF and WTO means corporate deglobalization and greater public regulatory oversight, fostering accountability and transparency.


          The first good reason is the climatic reason. I coined this term, the third F in fair and free trade, to emphasize that trade has to be placed within the context of a carbon-constrained world. By limiting international trade to frugal trade international trade would reduce the greenhouse gas emissions from international shipping and air freighting of exported goods. This obvious impact is the more important given that nations have not yet agreed on a mechanism of accounting for those emissions.


A second good reason is the economic one. Frugal trade is part of an economic theory and practice that places emphasis on living well within the Earth’s limits as they exist in a particular bioregion or watershed. This bioregional practice is a counterweight to corporate globalization process and emphasizes the need for deglobalization. What this means for the developing world is the ability to control transnational corporations in finance, insurance and real estate (FIRE), so that policy space is created for sustainable communities development in their own countries where local farmers need not to compete anymore with subsidized agricultural imports.



A third good reason is the ethical one. The frugal trade principle and policy can be considered to be just for people, species and planet. To a great extent, frugal trade is also fair trade because it places central the wellbeing of people and planet in a particular bioregion. It reinforces the trade action guide in the Earth Charter which declares that all trade is to support “sustainable resource use, environmental protection, and progressive labor standards” and that multinational corporations and international financial organizations are required “to act transparently in the public good, and hold them accountable for the consequences of their actions.”


A fourth good reason is the political one. It presents a philosophical counterweight to neo-liberal trade policies decreasing their legitimacy. It places the WTO and its General Agreement on Trade in Services together with the nationally uncontrolled (uncontrollable?) transnational corporations in the FIRE industries on the defensive. It presents an opening to have the UN Conference on Trade and Development regain the dominant international trade institution. The notion of frugal trade can become the fulcrum to highlight the unsustainability of the present international trade structures and of the monetary, financial, economic systems that support them.




Climate Change, Trade and the Tierra FD System

Post By gaia1 in Climate crisis

The 5 G’s proposal by the managing director of the Brookings Institution as a way to building a binding and ambitious post-Kyoto climate governance structure is an important one. It was given public exposure in the 2009 Brookings publication Climate Change, Trade, and Competitiveness at the UN Headquarters on 23 February, 2010 in a discussion session organized by the UN University UN Office.


The 5G’s are derived from the “experience of how the global trading regime built confidence in a self-regulating system. The GATT/WTO system built on a small group of states who, through a general agreement, were able to gear up domestic action over a generation.” The fifth G is graduation and deals with the biggest challenge of global governance, like in the trade regime, i.e.  “how to graduate nations when they emerge from being developing nations into industrialized ones.”


It makes sense to consider this gradual approach to building an international climate governance treaty. First of all, groups that have formed at Copenhagen can continue working together and come up with a general agreement that is ambitious enough in terms of global targets to gear up their constituencies to greater climate action. Secondly, such regional general agreements (RGAs) do not pose a direct challenge to national sovereignty the wise reduction of which is one of the greatest international challenges. Thirdly, those RGAs build trust among the cooperating nations and between the groups of nations of the other RGAs because their General Agreements are being exchanged, compared and debated, hopefully leading to a race to the top.


The fourth G—generation—is a weak link in the 5 Gs approach because of the urgency of the climate crisis. We do not have some 50 years to get a climate governance treaty in place. It took trade politics a very short while, as shown by Walden Bello in his 2004 De-globalization, once the US found its national interest to lie in liberalizing international trade within a corporate globalization process. The UN Conference on Trade and Development established in 1994 was pushed aside and not given any compliance function besides a data gathering and debate tasks.


The Tierra Fee & Dividend system which addresses both the challenges of the economic and climate crises considers the RGAs approach to climate institution building important, but does not think that G4—generation-- and G5—graduation-- are needed in this approach. Instead, it proposes that the RGAs exchanges are conducted within the UN structure and that nations establish a UN Commission on Monetary Transformation and the Climate Crisis that would, among other agenda items, consider developing and adopting a de-carbonization monetary standard that would reduce volatility in exchange rates, and build a balance of payments mechanism that would deal with both global financial and ecological/climatic imbalances. In terms of the resolution of the latter imbalances the fact of ecological indebtedness of the industrialized countries has to be recognized, for, as Jagdish Bhagwati has suggested in the above Brookings publication, without “a substantial superfund for past carbon emissions” no real progress is possible.